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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Majors Prepared To Borrow To Maintain Dividend Payments

Fifty-seven years after the birth of founding member Lol Tohurst, and the crude complex is still exploring whether ‘The Cure’ for low oil prices is…low oil prices.

Last night’s API report had a considerably bearish tilt, yielded a solid build of 3.8 million barrels to crude stocks, while Cushing stocks edged up also. It was the gasoline build of 6.6 million barrels, however, which stole the (bearish) show.

This huge build came amid a drop in refinery utilization, and although demand was likely dinged by inclement weather, especially in the Northeast (h/t winter storm Jonas), weaker gasoline demand of late is waving a red flag about the state of the broader economy.

It continues to be rough sailing for the oil majors, as Exxon swiftly followed BP’s quarterly earnings with an equally challenging set of results. Exxon posted its weakest annual results in over a decade. Although in contrast to BP it was able to book positive annual earnings, the $16.2 billion seen was a halving of last year’s level. Chevron said it will cut spending by $9 billion this year, while Exxon is slashing spending by 25 percent – or $7.9 billion.

 

As capital expenditures are cut, oil majors are instead looking to weather the storm and maintain their dividends by borrowing mo’ money. BP’s net debt increased by almost $5 billion last year to $27.2 billion, while Chevron’s total debt increased by nearly 40 percent last year. Shell hasn’t cut its dividend since World War II, but its will is going to be severely tested, especially after S&P cut its credit rating on Monday to its lowest ever. Related: How Soon Could A Sustained Oil Price Rally Occur?

(Click to enlarge) 

From one troubled area to another, we take a look at Nigeria. Africa’s top oil producer is holding talks with the World Bank for a loan to help plug its largest ever budget gap. Nigeria depends on oil for virtually all of its export revenue, and for two-thirds of its government revenue. Hence, as its budget deficit is projected to widen to 2.3 percent of GDP this year, it is seeking loans to fund its spending efforts to boost growth. Compared to some oil exporters, its budget deficit looks fairly minor. Related: Security Woes Threaten OPEC’s Second Largest Producer

As we can see from our ClipperData, Nigerian crude exports were above 2 million barrels per day in January. But just as exports pop above this level again, fears of terrorism are rising up once more in the Niger Delta.

An amnesty in the Niger Delta region has been in place for the past seven years, but the cutting of multi-million dollar contracts by President Buhari to former militant commanders has caused a resurgence in friction. These contracts were paid to commanders to guard the pipelines they once attacked. Related: Russia Cries Dyadya (Uncle), Is Saudi Arabia Listening?

But after the anti-corruption agency recently charged a former militant commander of money laundering, a number of pipelines were bombed last weekend. Although crude theft is not as rife as it once was, 250,000 bpd of Nigerian production is already stolen each day. The economy would be crippled by a resurgence of violence – and a drop in oil production – especially in the current low oil price environment. India, Netherlands and Spain are its largest destinations; these three account for ~45 percent of its total crude exports:

 

By Matt Smith

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